The Resources Boom and Fiscal Equalisation: The Case of Australia
Objective
The objective of this paper is to examine the impact of the resources boom in Australia on fiscal equalisation and to propose a different approach for the future.
Background
Australia was one of the first federations to introduce horizontal fiscal equalisation in the 1930s, after Western Australia had threatened to secede. Since then, Australia’s approach to fiscal equalisation has evolved and for the past thirty years, all Commonwealth general purpose grants to the States and Territories (all GST revenue since 2001) have been distributed according to the principle of fiscal equalisation.
Issues
In the past few years, Australia has been experiencing a resources boom supported by the bourgeoning demand from China and India for coal, iron ore, natural gas and other minerals. The resources boom has impacted differentially on the fiscal position of the states. Queensland and Western Australia, which have large deposits of these resources, have benefited the most and, after having been the major beneficiaries of equalisation payments since 1930s, both states have now become donors to fiscal equalisation payments, together with the two traditional donor states of New South Wales and Victoria.
This development has raised fresh questions regarding the fairness and efficiency effects of the Australian model of fiscal equalisation, which differs in important respects from equalisation models implemented in Canada, Germany and Switzerland. The logic of the Australian model has been always questioned by New South Wales and Victoria. Now, with Queensland and Western Australia joining in challenging this model of fiscal equalisation, the four largest states (together accounting for 88% of Australia’s population) are opposed to this model. In 2011, a high level Panel was established by the federal government to review this model and the Panel will report later in 2012. There is even an expectation in some quarters that the current model may be abandoned in favour of an equal per capita distribution of funds among the states. Thus, fiscal equalisation, historically regarded by many as the glue which kept the Australian federation together, is now under threat of being abandoned.
Data, methods and expected results
Against this background, this paper will analyse the key drivers of the change and its impact on state budgets. Our analysis will be based on the budgetary data ranging from 1981 to 2011 and we will also utilise the Productivity Commission’s annual assessments of State services to assess whether or not the fiscal (capacity) equalisation model has helped in promoting equalisation of services provided by the state governments. In doing so, this paper will also contribute to the current debates for moving towards a better, and fairer, system of fiscal equalisation in Australia.
Authors and Affiliations
Professor Bhajan S. Grewal
Professor Peter J. Sheehan
Centre for Strategic Economic Studies, Victoria University
PO Box 14428, Melbourne, VIC 8001, Australia
Phone: +613 9919 1344; Fax +613 9919 1350;
Email: Bhajan.Grewal@vu.edu.au
JEL Classifications: H11; H44; H72; and H77.